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CORRECTED-UPDATE 5-IBM ditches 2015 operating EPS target, shares slump 7 pct
October 20, 2014 / 11:57 AM / 3 years ago

CORRECTED-UPDATE 5-IBM ditches 2015 operating EPS target, shares slump 7 pct

(Removes reference to routers as a problem area in paragraph 10, corrects amount of planned restructuring charge to $600 million instead of $300 million in paragraph 12)

By Marina Lopes and Anya George Tharakan

Oct 20 (Reuters) - International Business Machines Corp reported a marked slowdown in business in September and abandoned its 2015 operating earnings target on Monday, as weak client spending and a slumping software sector weighed down quarterly revenue.

IBM shares fell nearly 7 percent to a three-year low, a blow for legendary investor Warren Buffett whose Berkshire Hathaway Inc is its top shareholder. The decline shaved more than $13 billion off of IBM's market cap, which stood at $182 billion at the stock market close on Friday.

"We are disappointed in our performance," said Ginni Rometty, IBM chairman, president and chief executive officer. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."

IBM, the world's largest technology services company, is struggling to keep up with shifts in the industry as hardware becomes increasingly commoditized. The company, once best known for mainframe computers, has been pivoting to higher-margin businesses such as security software and cloud services, but growth in those areas has failed to offset weakness elsewhere.

In a move to rid itself of one underperforming business, IBM also said on Monday it will hive off its loss-making semiconductor unit to contract chipmaker Globalfoundries Inc. In a sign of the unit's weakness, IBM is paying Globalfoundries $1.5 billion to take the unit over.

"Some of these fundamental shifts in the industry are happening faster than we planned," Rometty said on a call with analysts. "We are continuing to remix to higher value."

IBM is hardly the only technology company having a hard time keeping up with the shift to Internet-based software and storage systems. German software maker SAP SA cut its 2014 operating profit forecast on Monday, citing a faster-than-expected move to cloud-based software . Oracle Corp has grappled with similar issues.

IBM will divest low-performing businesses that will contribute almost $7 billion in revenue this year, and plans to continue getting out of those sectors, Rometty said.

Revenue from the company's cloud service unit, which allows businesses to access software and data remotely, grew more than 50 percent in the quarter, while mobile revenue doubled.

Still, they were not enough to offset weakness in servers and other hardware, as well as some software business lines.

An appreciating U.S. currency, which lowers the value of foreign revenue as reported in dollars, also weighed on earnings and will have a significant impact on profits in the fourth quarter and in 2015, Chief Financial Officer Martin Schroeter said.

The company is also preparing to take a $600 million charge for "workforce restructuring," but did not specify how many employees would be affected.

IBM, which said it would announce a new operating earning per share target for 2015 in January, reported a 4 percent drop in third-quarter revenues as clients held back on spending in September.

"IBM needs to find success and growth in the cloud through organic and acquisitive means in our opinion, otherwise there could be some darker days ahead for the tech giant (and its investors)," FBR Capital Markets analyst Daniel Ives said.

Revenue fell to $22.4 billion in the quarter from $23.34 billion a year earlier. Analysts expected $23.37 billion, according to Thomson Reuters I/B/E/S.

Net profit from continuing operations dropped to $3.46 billion, or $3.46 per share, from $4.14 billion, or $3.77 per share in the same quarter last year.

On an adjusted basis, the company earned $3.68 per share, missing the average analyst estimate of $4.31 per share.

IBM shares fell were down $12.90 to $169.15 in afternoon trading on the New York Stock Exchange.

Buffett, whose Berkshire Hathaway holds a 7 percent stake in IBM, did not immediately return a call seeking comment. (Reporting by Marina Lopes in New York and Anya George Tharakan in Bangalore; Editing by Don Sebastian, Ted Kerr, Jeffrey Benkoe and Andre Grenon)

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